The Trump administration is at war with itself over who should take the lead in the reform of the government-backed mortgage companies Fannie Mae and Freddie Mac – and just what that reform may look like, FOX Business has learned.
The battle centers on whether the Treasury Department should continue to advocate what it views as a plan for the future of the mortgage companies or cede control of those efforts to the incoming chief of the Federal Housing Financial Agency (FHFA), economist Mark Calabria, according to two people with direct knowledge of the matter.
The FHFA provides frontline regulation of the mortgage companies. White House economic officials want any Fannie and Freddie reform plan to be spearheaded by Calabria, even as the specifics of what he sees as the future of the outfits remain murky, they added.
The move by the White House advisers comes as Treasury Secretary Steven Mnuchin, who first told FOX Business about his reform views in 2016, and his adviser on housing policy Craig Phillips, and acting housing director Joseph Otting have made public statements suggesting that the reform of the companies is nearing completion. This has lifted shares of Fannie and Freddie higher as investors bet on a recapitalization of the outfits and the belief that a release from government control will enhance shareholder value.
But White House officials say shareholders won’t be the primary concern in the Fannie and Freddie reform effort. Rather, administration officials are seeking to prevent a repeat of the risk-taking activities by the companies that contributed to the mortgage bubble, leading to its 2008 collapse and $200 billion government bailout.
These officials, who spoke on the condition of anonymity, also say any reform must have the blessing of Calabria, a long-time libertarian economist and frequent critic of the outfit's pre-crisis business model.
“White House economic officials are telling Treasury nothing will happen with Fannie and Freddie until Calabria is in the job,” said a person with direct knowledge of the matter. “So as of now, all this talk about reform is just noise, and no one really knows what Calabria is going to do.”
Calabria is expected to be confirmed by the Republican-controlled Senate by the spring; the Senate Banking Committee is expected to vote to approve his nomination on Tuesday.
Spokespeople for the White House and the Treasury declined to comment, but would not dispute the tension over the reform effort.
Fannie and Freddie, also known as government-sponsored enterprises (GSEs), are linchpins of the country’s $10 trillion mortgage business in that they provide the liquidity for banks to make affordable 30-year fixed rate mortgages, particularly to first-time home buyers. They have been in what’s known as government conservatorship since 2008, casualties of the mortgage and financial crisis that nearly led to their demise until a taxpayer-financed bailout saved them from near-certain insolvency.
Since then, they have operated as de-facto arms of the federal government and continued their mandate to help provide affordable home ownership.
The GSE’s are now profitable and have repaid hundreds of billions of bailout money that kept them afloat—prompting the Trump administration to seek ending total government control of the companies, and possibly privatize the outfits.
Treasury Secretary Steve Mnuchin and his top house advisor Craig Phillips, have so far taken the lead through a series of broad public statements where they’ve called for ending the conservatorship. In January, acting director of the Federal Housing Agency Joseph Otting privately told employees about plans to end total government control of Fannie and Freddie, referring to Mnuchin’s past statements on the matter and stating that significant progress on a reform plan would occur over the next six to 18 months, according to a report from Politico.
While news of Otting’s statements boosted shares of Fannie and Freddie, the White House later clarified his remarks, saying no such plan was in the works—the first sign in the rift over GSE policy, according to people with knowledge of the matter.
Otting is seen as a close associate of Mnuchin and their relationship dates back to the Treasury secretary’s days as a banker and private investor. In 2008, Mnuchin hired Otting to run OneWest bank, the predecessor of the failed IndyMac bank that Mnuchin and a group of investors purchased in 2008 from the FDIC.
Mnuchin also has business ties with at least one of the major investors in the GSE’s stock that has benefited amid the speculation of a privatized Fannie and Freddie. Hedge fund giant John Paulson was an investor in OneWest bank, and prior to being Treasury secretary, Mnuchin invested in Paulson’s hedge fund.
Paulson – who has stakes in the GSE’s preferred class of stock -- has also submitted a proposal through his investment bankers that calls for the recapitalization and privatization of Fannie and Freddie. The Paulson plan also seeks to end the “net-worth sweep,” a move by the Obama administration where all of the GSE’s profits are swept into government coffers rather then sent back to the companies.
Spokespeople for for Paulsen and Otting both declined to comment.
A key feature of the framework touted by Mnuchin, Phillips, Otting and Paulson is that both Fannie and Freddie would have some backing from the federal government in times of emergency while remaining public companies, a business model similar to the one the GSEs operated with before 2008. Phillips, for example, is planning a series of meetings with mortgage industry executives next week to discuss Fannie and Freddie reform, these people add. A Treasury spokesman declined to make him available for comment.
But now some White House officials are telling people at the Treasury to back off and allow Calabria to the lead the effort once he officially replaces Otting, according to two people with direct knowledge of the matter.
Calabria is a wild card as far as GSE reform goes. He favors ending the GSE conservatorship and returning the sweep to the companies themselves. But he has been historically critical of Fannie and Freddie’s affordable housing mandate mainly during his years as an economist for libertarian think-tank, the Cato Institute.
Calabria, for example, has questioned the need for 30-year fixed rate mortgages, which is at the heart of the GSE’s mission, and whether securitization – or the GSE’s packaging of mortgages into bonds that are sold to investors – is good for the housing finance system.
He is also wary of returning Fannie and Freddie to their previous incarnations as private companies that have shareholders, but also receive backing from the federal government if they get in trouble as they did in 2008. That backup from the government allowed Fannie and Freddie to become immensely profitable during the housing boom years, but it also help lead to their demise as they guaranteed increasingly riskier mortgages under pressure from housing advocates to expand home ownership, Calabria is said to believe.
Another complicating matter for Calabria is how to deal with a divided Congress, which he recently said must be part of any reform plan. Senate Banking Committee chairman Mike Crapo, a Republican from Idaho, has a privatization plan, but many Democrats, including Maxine Waters, the powerful chair of the House Financial Services Committee, may not support an effort that would reduce Fannie and Freddie’s mandate to provide affordable housing.
A spokeswoman for the housing agency declined to comment and wouldn’t make Calabria available for comment.